US embassy cable - 04SANTODOMINGO685

UNCLAS SECTION 01 OF 02 SANTO DOMINGO 000685 
 
SIPDIS 
 
SENSITIVE 
 
DEPT. FOR WHA/CAR AND EB/ESC; 
TREASURY FOR DO: NLEE, RTOLOUI,LLAMONICA; 
DEPT PASS TO USTR/S.CRONIN; DEPT PASS TO AID/LAC 
 
E.O. 12958: N/A 
TAGS: BTIO, ENRG, EINV, ECON, DR 
SUBJECT: AES DOMINICANA TO SELL OFF ELECTRICITY 
DISTRIBUTION OPERATIONS 
 
1.  (SBU) SUMMARY:  AES Dominicana President Julian Nebreda 
and local generating facilities President Kevin Manning 
told DCM and Emboffs on February 3 that Virginia-based AES 
intends 
to sell its 50 percent share of Dominican distribution 
company EdeEste, 
which AES manages.  Nebreda cited monthly losses of $10 
million 
and the bleak outlook for the Dominican electrical sector as 
the 
main reasons.  AES will keep its investment in generating 
facilities 
and will remain the largest energy sector investor in the 
Dominican 
Republic.  END SUMMARY. 
 
2.  (SBU)  AES Dominicana President Julian Nebreda and local 
generating 
facilities manager Kevin Manning called on the DCM and 
emboffs on 
February 3 to advise that AES will announce on February 6 
the company's plans to sell its 50 percent ownership of 
EdeEste, the 
power distribution company which serves the East of the 
country.  Its 
U.S.-based parent company has made the firm decision and is 
writing 
off the investment entirely in its 2003 accounts.   Nebreda 
said 
the company has already contacted potential buyers.  AES 
would like 
to sell to a firm that would agree to a award a management 
contract to AES. 
 
3.  (U) EdeEste, along with the other two electricity 
distribution 
companies, was partially privatized in the late 1990s under 
the 
Fernandez administration.  Spanish-based Union Fenosa bought 
fifty 
percent of EdeSur and EdeNorte; AES bought the same 
percentage of 
EdeEste.  The government maintained half ownership in each. 
Last September 
the GODR repurchase of Union Fenosa's shares led to 
suspension of the 
International Monetary Fund Standby Agreement that had been 
signed in 
August. 
 
4.  (SBU)  AES officials said Edeste is losing about $10 
million a 
month and that in the present circumstances there are no 
prospects for 
the sector improving in the short term.  Nebreda noted that 
consumer 
collections were at about 90 percent of billing, but if GODR 
nonpayment 
is included, the percentage drops to about 83.  He said that 
does 
not take into account arrears in subsidy payments, unpaid 
since October.  Both Manning and Nebreda expected that 
consumer 
collections would drop further, noting the continuing peso 
depreciaiton 
and that many customers do not pay when there are frequent 
blackouts. 
 
5.  (SBU) Nebreda and Manning predicted that the GODR would 
intensify 
its negative campaign against the company after its February 
6 
announcement.  Manning cited January 25 remarks by Finance 
Minister Calderon 
on television disputing the government's debt to AES and 
claiming the 
company actually owed money to the GODR.  They said that the 
sale 
will make moot a recent GODR decree requiring the company to 
divest 
shares in one of the generating companies within the next 60 
days. 
The decree, initially issued last fall, stated that AES was 
in violation 
of the Dominican Electricity Law, which limits the amount of 
generating 
capacity that an entity could own if it also had ownership of 
distribution. 
 
COMMENT 
 
6.  (SBU)   AES is widely respected as an effective operator 
and an 
important voice for the electricity sector.  The company has 
led efforts 
to reform the sector. Its decision to withdraw comes as a 
GODR committee is 
studying requirements to re-privatize the other two 
distribution companies, with 
a mandate from President Mejia to propose sale of up to 75 
percent of shares. 
The AES move will be highly dissuasive to that effort and 
will hand the 
Mejia administration a vote of no confidence from the private 
sector. 
The Mejia administration is likely to continue its rhetoric 
of recrimination 
against generators and against distributors -- assuming that 
any private 
operator is willing to take over AES shares, the last 
remaining private 
sector ownership in the bad business of electricity 
distribution in the 
Dominican Republic. 
 
7. (SBU) When Union Fenosa got out last September, the GODR 
plunged into 
a debt-financed buyback, blowing up its new IMF standby in 
the process. 
The renewal of the standby is expected, finally, for next 
week. Given the 
very different operating styles of Union Fenosa and AES as 
well as the 
administration's long investment of effort in meeting IMF 
conditionalities, 
we do not -- repeat not -- predict a repeat performance. 
HERTELL